OpenAI Jony Ive deal sets record as startup M&A gets bigger
[LOS ANGELES] Venture-backed startups are staying private for longer – and growing so much bigger – that they are starting to be major acquirers of other startups, using their highly valued stock as currency.
OpenAI set a new record for a venture-backed acquisition by a private buyer this week when it agreed to buy famous hardware designer Jony Ive's company, io, for US$6.5 billion, according to data provider CB Insights.
It's the seventh billion-dollar sale of one private startup to another in the past year alone, CB Insights found, a record pace.
Just last week, Databricks announced that it's buying database business Neon for US$1 billion. That follows Databricks' agreement to buy another startup, Tabular, last year.
Startup sales to startups can often be messy and complicated – in part because they are often all-stock deals, and it can be hard to agree on what private stock is worth. Public companies have daily market cap changes, whereas private companies are relying on metrics from months or even years ago.
'When you are playing with Monopoly money, why not buy Boardwalk?' said Scott Stanford, co-founder and partner at ACME Capital. Stanford previously led Internet investment banking at Goldman Sachs, where he found that private-to-private deal discussions regularly fell apart.
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In addition to valuation considerations, Stanford said there's often a disconnect about who's going to run the business, because of the strong founding teams involved. It also depends on 'how the stakeholders behave', he added, noting that venture-backed companies tend to have a lot of independent-minded investors that might dispute a potential deal.
What's changed is the scale of deals, he said. 'Add a comma and all of a sudden these problems go away.'
After several years of malaise in the private markets and very few IPOs, acquisitions are looking ever more attractive – even if the buyers are private, said Heidi Mayon, a partner at Simpson Thacher.
'A lot of times I'm working with companies that think they are going public that end up getting sold,' she said. BLOOMBERG
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